Bank of Ghana Considers Weekly Dollar Sales to Support Cedi
February 08, 2012, 9:40 PM ESTBy Moses Mozart Dzawu and Chris Kay
(Updates with latest trading price in second paragraph.)
Feb. 8 (Bloomberg) -- The Bank of Ghana said it’s considering starting weekly dollar auctions and will continue to sell foreign-exchange reserves to support Africa’s second-worst performer against the dollar this year.
Ghana’s cedi slumped 2.9 percent this year and hit a 17- year low last month, as companies seeking to invest in the oil- led economy exchanged the currency for dollars to buy equipment from overseas. The cedi traded little changed at 1.6883 per dollar as of 7:38 a.m. in Accra, the capital.
“Foreign exchange auctions are being considered, but no decision has been taken as of yet,” Grace Akrofi, acting head of research at the central bank, said in a phone interview yesterday in Accra. Reserves have been used “to moderate the levels of the volatility and to meet some demand by importers that cannot be satisfied by their bankers,” she said.
The cedi has tumbled even as the economy expanded 13.6 percent in 2011 and is forecast by the Finance Ministry to grow 9.4 percent this year, boosted by the start of oil production for export at the Jubilee field in December 2010. The central bank sold $4.1 billion in 2011 to support the currency, up from $1.7 billion the year before, Akrofi said.
“I don’t think they anticipated the amount of demand,” Nema Ramkhelawan-Bhana, an Africa strategist at Rand Merchant Bank, said by phone from Johannesburg. “The cedi is under significant pressure.”
Policy Rate
The central bank held the policy rate at 12.5 percent since July as inflation in the world’s second-biggest cocoa producer held at 8.6 percent for a third month in December. The cedi has declined 10 percent since September. Governor Kwesi Amissah- Arthur will present the Monetary Policy Committee’s decision on the key lending rate on Feb. 15.
If cedi depreciation persists, Ghana’s central bank may start increasing interest rates in the first half of 2012 to curb the risk of higher inflation, Yvonne Mhango, a Johannesburg-based economist at Renaissance Capital, said in a note Jan. 19.
“Continued foreign exchange demand for imports and other important commitments are likely to combine with some fiscal slippage and general risk-aversion in the run-up to the country’s December 2012 elections,” Michael Kafe and Andrea Masia, economists at Morgan Stanley in Johannesburg wrote in a Jan. 16 report. The cedi may weaken to 1.85 per dollar by the year end, they said.
Election Spending
President John Atta Mills is seeking a second term in office and faces the same challenger he defeated by less than 1 percentage point in 2008. That year, election spending helped drive the country’s budget deficit to 14.5 percent, according to the Ministry of Finance and Economic Planning.
Finance Minister Kwabena Duffuor has vowed to keep spending in check this year, pledging a fiscal gap of 4.8 percent, unchanged from a year earlier. The current account deficit is expected to narrow to $2.6 billion this year from $3.5 billion in 2011, Akrofi said.
“There is commitment of the political leaders that expenditures are contained,” she said.
“If policy is aggressively tightened, slowing import demand somewhat, then the growing loss of cedi confidence would not develop further,” Standard Bank Group Ltd. strategists led by London-based Stephen Bailey-Smith wrote in a Jan. 18 report. “If confidence is not proactively re-built, then there is a possibility we end the year nearer 2 cedi per dollar.”
--With assistance from Emily Bowers in Accra. Editors: Peter Branton, Linda Shen
To contact the reporters on this story: Moses Mozart Dzawu in Accra at mdzawu@bloomberg.net; Chris Kay in Abuja at ckay5@bloomberg.net
To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net
